The past nine months or more have been an absolute headache for practitioners trying to understand the extent and application of the super reforms.
Now it is implementation phase, which has been causing another layer of headaches, especially in relation to the interlinking of exempt current pension income (ECPI), the capital gains tax (CGT) relief provisions and the transfer balance cap (TBC).
In the September edition of its “SMSF News Alert”, the ATO outlined its position on the treatment of ECPI and SMSFs where assets are only segregated for part of the income year.
The ATO confirmed ‘deemed’ segregation to be where all assets of the fund are supporting income stream benefits. An actuarial certificate is not required to support the ECPI calculations for this period when all the assets are classified as segregated current pension assets. This follows through the ATO’s reasoning in relation to the position of the fund on 9 November 2016 and the CGT transitional relief provisions: “It is important to note though, that for the 2017/18 financial year onwards, an SMSF cannot use the segregated method to calculate ECPI if a member has a total superannuation balance over $1.6 million immediately before the start of the relevant income year and that member is receiving an income stream from any source including the SMSF or another super provider.”
If during an income year the pension is commenced part way through the income year or it was fully in pension phase and then a contribution was made and the SMSF’s assets are not segregated, the fund will be required to use the proportionate method to calculate ECPI for the period that the fund had both pension and accumulation liabilities. An actuarial certificate will be required. Therefore, depending on the transactions and different phases of the fund, the calculation of ECPI will need to be broken down into time periods and calculated separately. This is potentially another administrative nightmare.
Due to this position and ‘industry practice’ on treating the fund as unsegregated for ECPI calculations over the entire financial year, even where there was a period of full pension, the ATO has provided an administrative concession. This concession will apply in accordance to 2016/17 and prior. The tax office has stated it will not be allocating compliance resources for prior year ECPI calculations where those calculations have been based on ‘industry practice’. However, even though this administrative concession is available, the net taxation position of the fund will be treated on a case-by-case basis. In some instances, it may be better to treat the solely in pension period as segregated and then the balance of the financial year as proportionate for ECPI calculations.
It is also important to note the method of calculating the ECPI for the fund in relation to the CGT relief will be dependent on the fund’s position as at 9 November 2016. If the fund was solely in pension phase, the fund is ‘deemed’ to be segregated. At that date, the excess amount above the $1.6 million TBC is commuted, the CGT relief kicks in, the cost base is reset and the notional gains are disregarded. In calculating the ECPI for the year, the SMSF trustees of the fund have two options in relation to the newly created accumulation account. They can continue to adopt the segregated method in which specific assets are commuted and documented or they can choose to adopt the proportionate method for the entire year.
In relation to the proportionate method, even if the excess amount was commuted for TBC purposes on 30 June 2017, the ATO has confirmed that an actuarial certificate is still required even for that one day.
In calculating the ECPI under the proportionate method, the trustee can either:
- Obtain an actuarial certificate for only the days the fund was in both pension and accumulation. Only the income earned on the days in relation to the accumulation accounts would be assessable income. This follows the ATO’s view and adoption required for 2017/18 and onwards or,
- Apply the proportionate method across the full financial year as per the ATO administrative concession. Note the CGT relief would still apply based on the segregated method as per the fund’s position as at 9 November 2016. As a result, the notional gains realised as per the CGT relief will not be included in the ECPI calculations as they are disregarded completely.
Therefore, calculating ECPI in the post-super-reform world is not without its complexities. Throw in the ATO’s position, while providing clarity, and that provides another level of decision-making.